Morgan Stanley Chief Equity Strategist Mike Wilson Talks Markets

Bloomberg Audio Studios, podcasts, radio news. The traders await the release of key economic data, albeit highly stale. We begin this hour with stocks eyeing a rebound as we head into that shortened Thanksgiving trading weekend. The team at Morgan Stanley releasing their outlook for twenty twenty six, writing, we raise our S and P five hundred price target to

Thanks Lisa.

So let's start on the optimism. We have been optimistic for quite a while, talking about the rotation into the adopters, not just the AI tech behemoths. Why are you getting even more optimistic as the year goes on.

Well, I would say it's just a change. It's an evolving narrative we've had, which is that we think that the policy still misunderstood, right, that they essentially came in this year to the growth negative stuff first, and now we're looking at the growth positive stuff. I'm not worried about the economy. What I am a little bit worried about is that the FED is kind of dragging its feet.

So there's a lot to unpack there. I want to start with you agreeing with Neil, because Neil had a pretty negative assessment of the overall economy, saying he suspects the train's already left the station with respect to the pain from the FED keeping rates where they are for as long as they have, and that we could be looking at a recession. You seem to disagree on that.

Yeah, I mean, I think our view has been differentiated that we think we have had a recession. We went through a rolling recession in the private economy. So I would agree with Neils that the economy is weak, but

I say.

One of the things that Neil talked about was his fear that even if they cut in December, they're not going to lay out a path for continuous cuts, and FED Governor Waller seemingly enforcing that speaking on Fox moments ago, saying you might see more of a meeting by meeting approach once you get to January. If you do get that posturing from the FED that maybe they cut in December, but it's a meeting by meeting approach. They're not necessarily

No, we need the ladder, and I think we're going to get there one of two ways. Either the data, you know, the labor data is going to basically support our view or my view that we had a rate of change trough and the labor markets in April, okay, and so that data then will allow the FED to cut more or signal they're going to cut more. The second one is that we get more financial stress.

Okay, that's what's been going on. We think the market.

We wrote about this back in September early October, we thought the market was going to have a ten to fifteen percent correction because the liquidity wasn't there, that the balance you was tightening, and we think there's evidence that that correction is well advanced.

Okay. All the momentum stocks.

You know, Crypto obviously is the topic of the date. Down thirty percent for bitcoin. I mean, these things are telling you that the market is worried about this liquidity. So as usual, the markets will dictate the Fed's timing. So if the market really wants and look, markets are like children, right, they'll have a little temper tantrum and

On the point of Crypto, a lot was made, I mean even from Bill Ackman basically saying things that he thought weren't correlated. All of a sudden word that Fanny and Freddy were selling off because the people who were buying Crypto were the same people in those names did last week in the week before's episode. Given how much Crypto falls, show some vulnerability within the market structure, within who owns these stocks, and how fragile and weak some of those hands are.

I don't think it's showing anything new. I think this has been their whole time, right, I mean.

I don't people waking up to the idea that liquidity is important for the market. I mean, obviously I don't know what they're doing. I mean that's kind of crazy. Of course, liquidity matters. I mean liquidity is, and especially the last ten years or so, I think that the hard part about liquidity is it's sort of this sort of nebulous thing.

It's hard to measure.

And I've spent a lot, like the last two or three years trying to develop a better skill set around that, and I think we've got a better handle, but I would I would say still is one of these things that's sort of the invisible hand. And so what you have to do is you have to look at the market to tell you when liquidity is tight or not.

So you kept mentioning the balance sheet. Are you saying que's going to start again.

Well, they may not call it Q, but yeah, the balance sheet needs to expand, not only to support financial markets, but to support the better growth.

That I think is coming next year.

Right, So if CAPEX really picks up for the first time in ten years, OK, let's be honest, we haven't seen much capital spending, but the big beautiful bill is in scenting that that's a usage of capital that.

Needs to be supplied by somebody.

So the balance sheet needs to grow just to help the economy and the markets, and so we can call it QE, call it not QE, but generally they need to expand that.

How much is a seventy eight hundred target predicated on the idea of the FED cutting rates and using its balance sheet to help support liquidity.

It's very important.

I mean, I would say if we don't get at least one of those items surprising the market, it's meaning more than three cuts, or we get more balance sheet expansion and call a QE, call it something else, okay, yo, curve control, whatever you want to call it.

Okay.

If we don't get some combination of that, then we're not going to reach our target.

So I'm assuming that we get.

There either through the labor data or through some financial stress.

So it has been so far that the AI trade has maintained any kind of equity valuation, despite the fact that people are getting increasingly worried about an economy that you think already has gone through recession. I just wonder do you think that ship sailed in terms of AI leadership propic things up. Do you think that if we don't get the real economy reaccelerating, you cannot get the multiples that we currently have been seeing on the big tech names.

Yeah.

I think it's one of the same. I mean, obviously, the investment in AI is on the premise that it will lead to higher productivity, adoption and all that works. I mean, that's the way technology investment works. So you're not going to these stocks.

Are not going to work. Leaders aren't going to work if the.

Foundation itself isn't being supported by the technology investment. We assume that is going to happen in twenty twenty six. That is part of our thesis. Okay, but it's not without risk. So our job is to lay out our narrative, which we have conviction in, but then to highlight these risks in the short term or in the medium term. That could though that that could throw that narrative off.

Edi R.

Denny also joined us earlier, just saying that some of the air is being taken out of the AI bubble, and to him that meant that the mel tip that we've been seeing is going to be harder to come by. Has something changed at least with that blind willingness to continue to buy AI related stocks regardless of how much they're spending and what the return on that spend is.

Well, I mean, this is a natural evolution of any capital spending cycle. There's always going to be a challenge on the return you're going to get. And this is you know, we've seen this multiple times. We saw it a year ago. We've talked about this, you know multiple times. In July of twenty twenty four, that was the peak and sort that an AI campbacks deceleration. So this is an EBB and flow. What I like to look at

But we think this is going to happen.

The money's been raised now, so we don't think the debt markets are now involved, and so that money is not going to sit on these balancees.

It's going to be spent.

The question is what's the payoff look like and what's the timing of that payoff. We think we'll see some of that in twenty twenty six, twenty twenty seven, and so now it's just this transition. You're kind of trading back and forth. So I want to make it clear we think there's a broadening out. That doesn't mean that all the AI stuff gets killed and everything else does really really well. It can work in harmony. In fact, it needs to work in harmony to some degree.

If you do get a scenario though we're let's say, I don't know, meta that seems to be one of the post your children for not getting that return doesn't get it as much, and they need to pull back on their spending, but everybody else is still spending. Do you only need one pillar to fall to really hurt this trade or can just any sort of spending happening within this trade, regardless of who the winner is, continue to lift all the boat.

Well, look, I mean, look what's been going on, right, So we've seen a massive bifurcation or dispersion and the performance of not only the hyperscalers but names within that. To me, that's healthy. That's like not everybody's gonna win, Like there's no trophies here. I mean, you have to

So next year or maybe the end of this year, when we find out who the next FED chair is going to be, how much will that matter to you in terms of whether your goal case will get realized? I mean, who will necessarily be good for that and who might be a little more problematic for that.

You're probably not gonna like my answer, but it doesn't matter to me because ultimately, the market's going to tell the FED what to do. I mean, that's my general that's always been my view. People hate it, but like I'm a markets person, Okay, the market's dominant. The markets tell investors what to do, right, so the markets will you kind of force their hand. If the market's believe they need more liquidity, they will force the fast hand.

Michaelson, wonderful to speak with you, Michaelson of Morgan Stanley.

Have a wonderful Thanksgiving.

Thank you for being here.